Supply Chain Management

Over the past few months I have had the opportunity to discuss Supply Chain Management with a number of companies. I was surprised that many of them were taking a beat the supplier up for a “BETTER PRICE” approach. The good news is that in many cases they are seeing a reduction in prices up 5%. Now the bad news: incoming quality has dropped over 10% and delivery performance has dropped to below 80% on time. But they have gotten up to a 5% improvement in PPV (Purchase Price Variance). The cost of the additional incoming inspection, the rework or return to supplier cost and the cost of delays is not being considered in PPV. These additional costs are absorbed in production overhead. So where are the real savings? What is the true bottom line impact? The reality is that there is nothing in the world that can’t be purchased at a cheaper price. The question is, what level of quality will we see, if and when it shows up…
The companies who have been most successful at Supply Chain Management take a different approach. Their approach is called Supply Chain Partnerships. These Partnerships are designed to develop a WIN/WIN relationship with their key suppliers. Their focus in on three things, Dramatic Improvements in Quality, Dramatic Improvements in Delivery Performance and Dramatic Improvement in Reducing Cost. The overall long term goal is to develop long term relationships with key or critical to success suppliers. This is not a quick fix improvement. This is a long term approach to improving quality, delivery and reducing overall cost. Some companies have been working Supplier Partnerships for over 25 years.
The methodology that they employ is a technique developed by Dr. Juran in the 50”s. This technique is called “Fit to Use” or “Fit to Pass”. Material or Information is considered “Fit to Pass” when the customer can use that material or information without incurring any additional cost in order to be able to use it. This means that the customer must clearly communicate their requirements to the supplier and that the supplier and the customer work diligently with each other to meet those requirements. The companies who have been most successful with this approach have applied it to their own internal processes first. This approach has helped them to master the concept of “Fit to Pass”.
After you master the concept of “Fit to Pass’ internally you are now ready to approach a small number of key suppliers to start working on the Partnership.
Partnership is a dedicated learn-by-doing improvement effort requiring an investment from both sides. The WIN/WIN is that the savings in total cost are shared equally. Remember this is a long term improvement effort.
Now at the same time you are working on the Supplier Partnerships you can also work on improving the information that you are providing to all of your suppliers. Most companies use some form of MRP to plan their material requirements. However, if you were to measure the accuracy of the data that MRP uses to do the calculations you will find that there might be an opportunity to improve the information that you are providing to you buyers and your suppliers. The primary inputs to MRP are the Master Production Schedule, Planning Parameters, Bills of Material, Open Orders (purchase orders and work orders), and On Hand Inventory.
The output of MRP is purely the result of these inputs. So here is the key question, do you know what your input accuracy is? Even if the accuracy of these inputs are all at 90% the output from MRP will only be (.9 x .9 x .9 x .9 x .9 = 59%) at best 59% accurate. Now the good news, improving the database accuracy is a much quicker fix. Usually this is a 6-12 month improvement effort with known approaches to raise the levels of accuracy. Being able to provide your suppliers with a better plan and more accurate information is a good first step in building the trust necessary to move towards a Supplier Partnership.

(“The Professional Provoker”) is the Founder and President of Empowered Performance, LLC a worldwide management education and consulting firm. Michael has extensive international experience working with companies of varied sizes and industries helping them implement strategies to attain World-Class levels of performance.
Michael has developed expertise in “Enterprise Excellence”, Enterprise Resource Planning and Supply Chain Management (ERP/SCM), Lean (Toyota Production System), Team Building and Problem Solving, Six Sigma and Reengineering Business Processes. He is considered an expert in helping companies develop and implement Strategic Business Units and fast response customer service production units.